The Real Effects of Liquidity During the Financial Crisis: Evidence from Automobiles
74 Pages Posted: 18 Oct 2014 Last revised: 8 Feb 2016
Date Written: October 17, 2014
This paper shows that illiquidity in short-term credit markets during the financial crisis may have sharply curtailed the supply of non-bank consumer credit. Using a new data set linking every car sold in the United States to the credit supplier involved in each transaction, we show that the collapse of the asset-backed commercial paper market decimated the financing capacity of captive leasing companies in the automobile industry. As a result, car sales in counties that traditionally depended on captive-leasing companies declined sharply. Although other lenders increased their supply of credit, the net aggregate effect of illiquidity on car sales is large and negative. We conclude that the decline in auto sales during the financial crisis was caused in part by a credit supply shock driven by the illiquidity of the most important providers of consumer finance in the auto loan market: the captive leasing arms of auto manufacturing companies. These results also imply that interventions aimed at arresting illiquidity in credit markets and supporting the automobile industry might have helped to contain the real effects of the crisis.
Keywords: liquidity, crises, credit
JEL Classification: G2, E32, E44
Suggested Citation: Suggested Citation